Week Ending April 16

Oil prices rallied to their highest mark in about a month with WTI settling Friday at $63.13/Bbl. The oil complex received support after both the International Energy Agency (IEA) and OPEC brightened their forecasts for demand in 2021. The IEA lifted its forecast for oil consumption this year by 230 MBbl/d amid a more robust outlook for the U.S. and China. OPEC's research team now forecasts 2021 demand to rise by 5.95 MMBbl/d, a 70 MBbl/d increase from last month's outlook. Adding further support to price this week was a better-than-estimated U.S. crude oil inventory withdrawal.

Prices may be up, but risks remain. There is nervousness about COVID outbreaks affecting demand. India's infection rate reached a new record this week, while Germany's Merkel said a third wave of the coronavirus had the country in its grip. There are non-COVID concerns; Iranian supply is estimated to rise further despite U.S. sanctions. Iran's production growth could force the rest of OPEC+ to alter their cooperative supply strategy.

AEGIS clients have generally been topping off their portfolios with additional hedges over the past three weeks as the oil markets have been mostly flat for the past month. AEGIS recommends hedging oil with swaps for at least the balance of 2021 — a conservative strategy. We see the risk in 2022 and beyond as more inflationary and suggest using more upside-friendly structures such as costless collars, if appropriate for the producer's risk tolerance.

Natural gas prices moved higher this week (April 16) after weather forecasts turned colder and last week's storage injection was smaller than expected. The prompt month gained 16c on the week to finish Friday at $2.68. The Winter 2021-2022 strip settled above $3.00/MMBtu on Friday, the first time since early March.

By our estimates, gas supply and demand are trending closer to balanced, and it has been an impediment to higher prices. Production has overperformed this spring, and renewables have run at record seasonal rates. The latter has encroached on gas demand. We still remain constructive on forward pricing for gas. Based on current data, our estimated end-of-season storage (October) is about 3.5-3.6 Tcf. However, if wind generation fades as we move to summer, and production plateaus, inventories may struggle to get to that level. This would be bullish. If the market is closer to balanced, which we have observed lately, the forward curve may be priced right.

AEGIS recommends costless collars for most gas hedges, given our price expectations. However, the balance of Summer (May '21 - Oct '21) is trading at $2.81, and Winter 2021-2022 is at $3.04. These levels may be attractive enough for certain producers to use swaps rather than collars. Beyond Winter 2021-2022, we suggest using collars as we believe this part of the curve is undervalued.